TY - JOUR
AU - Frenkel,Jacob A.
AU - Aizenman,Joshua
TI - Aspects of the Optimal Management of Exchange Rates
JF - National Bureau of Economic Research Working Paper Series
VL - No. 748
PY - 1981
Y2 - September 1981
DO - 10.3386/w0748
UR - http://www.nber.org/papers/w0748
L1 - http://www.nber.org/papers/w0748.pdf
N1 - Author contact info:
Jacob Frenkel
Dr. Jacob A. Frenkel
Chairman, JPMorgan Chase International
270 Park Ave 46th floor
New York, NY 10017
Tel: +1 212 270 2393
Fax: +1 212 270 2397
E-Mail: jacob.frenkel@jpmchase.com
Joshua Aizenman
Economics and SIR
USC
University Park
Los Angeles, CA 90089-0043
Tel: 213-740-4066
E-Mail: aizenman@usc.edu
AB - This paper analyzes aspects of the economics of the optimal management of exchange rates. It shows that the choice of the optimal exchange rate regime depends on the nature and the origin of the stochastic shocks that affect the economy. Generally, the higher is the variance of real shocks which affect the supply of goods, the larger becomes the desirability of fixity of exchange rates. The rationale for that implication is that the balance of payments serves as a shock absorber which mitigates the effect of real shocks on consumption. The importance of this factor diminishes the larger is the economy's access to world capital markets. On the other hand, the desirability of exchange rate flexibility increases the larger are the variances of the shocks to the demand for money, to the supply of money, to foreign prices and to purchasing power parities. All of these shocks exert a similar effect and their sum is referred to as the "effective monetary shock." It is also shown that the desirability of exchange rate flexibility increases the larger is the propensity to save out of transitory income. When the analysis is extended to an economy which produces traded and non-traded goods it is shown that the desirability of exchange rate flexibility diminishes the higher is the share of non-traded goods relative to traded goods and the lower are the elasticities of demand and supply of the two goods.
ER -